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Chapter 11
Reporting and Interpreting Owners’ Equity
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Understanding The Business
Advantages of a corporation
Simple to become an
owner
Easy to transfer
ownership
Provides limited liability
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Because a corporation is a separatelegal entity, it can . . .
Own assets.
Sue and be sued.
Incur liabilities.
Enter into contracts.
Understanding The Business
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Ownership of a Corporation
Rights
Voting (in person or by proxy).
Proportionate distributions of
profits.
Proportionate distributions of
assets in a liquidation.
Stockholders
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Ownership of a Corporation
Vice President(Production)
V ice President(Ma rketing)
V ice President(F ina nce)
V ice President(C ontro ller)
President
B oa rd of D irectorsInterna l (m a na gers) a ndExterna l (non-m a na gers)
S tockholders(O w ners of voting sha res)
Elected byshareholders
Appointedby directors
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Authorized, Issued, and Outstanding Capital Stock
The maximum number of shares of capital
stock that can be sold to the public.
AuthorizedShares
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Authorized, Issued, and Outstanding Capital Stock
AuthorizedShares
Issued shares are authorized shares of stock that have been
sold.
Unissued shares are authorized shares of stock that
never have been sold.
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Authorized, Issued, and Outstanding Capital Stock
AuthorizedShares
UnissuedShares
TreasuryShares
OutstandingSharesIssued
SharesTreasury shares are
issued shares that have been reacquired by the
corporation.
Outstanding shares are issued shares that are
owned by stockholders.
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Earnings Per share (EPS)
Income
Average Number of Shares OutstandingEPS =
Outback’s income for 2000 is $141,000,000 and the average number of
shares outstanding is 77,500,000.
Outback’s income for 2000 is $141,000,000 and the average number of
shares outstanding is 77,500,000.
Earnings per share is probably the single most widely watched
financial ratio.
Earnings per share is probably the single most widely watched
financial ratio.
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Income
Average Number of Shares OutstandingEPS =
Earnings per share is probably the single most widely watched
financial ratio.
Earnings per share is probably the single most widely watched
financial ratio.
$141,000,000
77,500,000 SharesEPS = = $1.82 per share
Earnings Per share (EPS)
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Outback Ruby Tuesday Wendy's$ 1.82 $ 1.44 $ 0.91
2000 Earnings Per Share
Earnings Per share (EPS)
Earnings per share is probably the single most widely watched
financial ratio.
Earnings per share is probably the single most widely watched
financial ratio.
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Types of Capital Stock
Common Stock
Preferred Stock
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Common Stock
Basic voting stock
Ranks after preferred
stock
Dividend set by board of
directors
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Par Value and No-par Value Stock
Legal capital is the amount of capital, required by the state, that must remain
invested in the business.
Par Value
Nominal value
Legal capital
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Par Value and No-par Value Stock
Par Value
Market Value
I get it!
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No-par Value Stock
Some states do not require that a
par value be stated in the
charter.
Some states do not
require a par value to be
stated in the charter.
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Accounting for Capital Stock
Two primary sources of stockholders’ equity
Retained earnings
Contributed capital
Parvalue
Additional paid-in capital
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Sale and Issuance of Capital Stock
Initial public offering (IPO)
Seasoned new issue
The first time a corporation sells
stock to the public.
Subsequent sales of new stock to the
public.
Outback
issues new stock.
Outback
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Secondary Markets
Transactions between two investors that do not affect the corporation’s accounting
records.
I’d like to sell some of my
Outback stock.
I’d like to buy some of your
Outback stock.
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GENERAL JOURNAL Page 34Date Description Debit Credit
July 6
Sale and Issuance of Capital StockOn July 6, Outback issued 100,000 shares
of $0.01 par value common stock for $22 per share.
Prepare the journal entry to record this transaction.
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GENERAL JOURNAL Page 34Date Description Debit Credit
July 6 Cash 2,200,000
Common Stock 1,000
Capital In Excess of Par Value 2,199,000
Sale and Issuance of Capital Stock
100,000 shares × $22 per share = $2,200,000
100,000 shares × $0.01 par value = $1,000
On July 6, Outback issued 100,000 shares of $0.01 par value common stock for $22
per share.
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Capital Stock Sold for Noncash Assets and/or Services
Record assets or services received at the market value of the stock at the date of the
transaction.
Record assets or services received at the market value of the stock at the date of the
transaction.
Accountant
Provides accounting
services
Issues stock Outback
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Capital Stock Sold for Noncash Assets and/or Services
If the market value of the stock cannot be determined, then the market value of the assets
or services received should be used.
If the market value of the stock cannot be determined, then the market value of the assets
or services received should be used.
Accountant
Provides accounting
services
Issues stock Outback
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GENERAL JOURNAL Page 12Date Description Debit Credit
Mar. 14
Capital Stock Sold for Noncash Assets and/or Services
On March 14, Outback issued 10,000 shares of its $0.01 par value common
stock to the Rose Law firms. The stock was selling for $15 per share.
Prepare the journal entry to record this transaction.
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GENERAL JOURNAL Page 12Date Description Debit Credit
Mar. 14 Legal Fees 150,000
Common Stock 100
Capital In Excess of Par Value 149,900
Capital Stock Sold for Noncash Assets and/or Services
10,000 shares × $15 per share = $150,000
On March 14, Outback issued 10,000 shares of its $0.01 par value common
stock to the Rose Law firms. The stock was selling for $15 per share.
10,000 shares × $0.01 par value = $100
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Stock Options
Management
Management compensation
package includes salary and stock
options.
Stock options allow management to purchase
stock from the corporation at a fraction of the stock’s
value in the secondary market.
If Outback does not have new stock to issue when the stock options are exercised, then . .
Outback
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Treasury StockOutback buys
its own stock in
the secondary market.
(Treasury stock) Stockholders
Management
Management compensation
package includes salary and stock
options.
Stock options allow management to purchase
stock from the corporation at a fraction of the stock’s
value in the secondary market.
Outback
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Treasury Stock
No voting or
dividend rights
Contra equity
account
When stock is reacquired, the corporation records the treasury stock at cost.
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Treasury Stock
GENERAL JOURNAL Page 27Date Description Debit Credit
May 1 Treasury Stock 2,000,000
Cash 2,000,000
100,000 shares × $20 = $2,000,000
On May 1, Outback reacquired 100,000shares of its common stock at $20 per share.
The journal entry for May 1 is . . . .
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GENERAL JOURNAL Page 68Date Description Debit Credit
Dec. 3 Cash 300,000
Treasury Stock 200,000
Capital in Excess of Par 100,000
Treasury Stock
10,000 shares × $30 = $300,000
10,000 shares × $20 cost = $200,000
On December 3, Outback reissued 10,000shares of the treasury stock at $30 per share.
The journal entry for December 3 is . . .
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Accounting for Cash Dividends
Declared by board of directors.
Not legally required.
Creates liability at declaration.
Requires sufficient Retained Earnings
and Cash.
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Dividend DatesDeclaration date
Board of directors declares the dividend.Record a liability.
GENERAL JOURNAL Page 12
Date DescriptionPost. Ref. Debit Credit
Retained Earnings XXX
Dividends Payable XXX
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Dividend Dates
X
Date of RecordStockholders holding shares on this date will
receive the dividend. (No entry)
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Dividend Dates
GENERAL JOURNAL Page 12
Date DescriptionPost. Ref. Debit Credit
Dividends Payable XXX
Cash XXX
Date of PaymentRecord the dividend payment to
stockholders.
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Dividend Yield Ratio
Dividend
Yield
Dividends Per Share
Market Price Per Share=
This ratio is often used to compare the dividend-paying performance of different
investment alternatives.
This ratio is often used to compare the dividend-paying performance of different
investment alternatives.
Outback does not pay a cash dividend. The 2000 market price is $27.
Outback does not pay a cash dividend. The 2000 market price is $27.
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Dividend Yield Ratio
Dividend
Yield
Dividends Per Share
Market Price Per Share=
Dividend
Yield
$0.00
$27.00= = 0.0%
This ratio is often used to compare the dividend-paying performance of different
investment alternatives.
This ratio is often used to compare the dividend-paying performance of different
investment alternatives.
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Dividend Yield Ratio
This ratio is often used to compare the dividend-paying performance of different
investment alternatives.
This ratio is often used to compare the dividend-paying performance of different
investment alternatives.
Outback Ruby Tuesday Wendy's0.0% 0.2% 0.9%
2000 Dividend Yields
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Accounting for Stock Dividends
Distribution of additional sharesof stock to stockholders.
No change in total stockholders’ equity.
All stockholders retain same percentage
ownership.
No change in par values.
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Stock dividend < 25%Stock dividend < 25%
Stock Dividends
Stock dividend > 25%Stock dividend > 25%
Record at currentmarket value
of stock.
Record at currentmarket value
of stock.
Record atpar valueof stock.
Record atpar valueof stock.
Small Large
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Stock Splits
Distributions of 100% or more
of stock to stockholders.
Ice Cream Parlor
Banana Splits On Sale Now
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Stock SplitsAssume that a corporation had 5,000shares of $1 par value common stock
outstanding before a 2–for–1 stock split.
Before Split
After Split
Common Stock Shares 5,000
Par Value per Share 1.00$
Total Par Value 5,000$
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Stock Splits
Increase
Decrease
No Change
Before Split
After Split
Common Stock Shares 5,000 10,000
Par Value per Share 1.00$ 0.50$
Total Par Value 5,000$ 5,000$
Assume that a corporation had 5,000shares of $1 par value common stock
outstanding before a 2–for–1 stock split.
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Preferred StockPreference
over common stock
Usually hasno voting
rights
Usually has a fixed dividend
rate
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Dividends on Preferred Stock
Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.
Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.
Current Dividend Preference: The current preferred dividends must be paid before paying any dividends to common stock.
Cumulative Dividend Preference: Any unpaid dividends from previous years (dividends in arrears) must be paid before common dividends are paid.
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Dividends on Preferred Stock
If the preferred stock is noncumulative, any dividends not declared in previous years
are lost permanently.
If the preferred stock is noncumulative, any dividends not declared in previous years
are lost permanently.
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Dividends on Preferred Stock
Kites, Inc. has the following stock outstanding:Common stock: $1 par, 100,000 shares
Preferred stock: 3%, $100 par, cumulative, 5,000 shares
Preferred stock: 6%, $50 par, noncumulative, 3,000 shares
Dividends were not paid last year. In the current year, the board of directors declared dividends of
$50,000.
How much will each class of stock receive?
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Dividends on Preferred StockTotal dividend declared 50,000$
Preferred stock (cumulative)
Remainder
Preferred stock (noncumulative)
Remainder
Common stock
Remainder
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Dividends on Preferred StockTotal dividend declared 50,000$
Preferred stock (cumulative)Arrearage ($100 par × 3% × 5,000 shares) 15,000$ Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000
Remainder 20,000$
Preferred stock (noncumulative)
Remainder
Common stock
Remainder
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Dividends on Preferred StockTotal dividend declared 50,000$
Preferred stock (cumulative)Arrearage ($100 par × 3% × 5,000 shares) 15,000$ Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000
Remainder 20,000$
Preferred stock (noncumulative)Current Yr. ($50 par × 6% × 3,000 shares) 9,000
Remainder 11,000$
Common stock
Remainder
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Dividends on Preferred StockTotal dividend declared 50,000$
Preferred stock (cumulative)Arrearage ($100 par × 3% × 5,000 shares) 15,000$ Current Yr. ($100 par × 3% × 5,000 shares) 15,000 30,000
Remainder 20,000$
Preferred stock (noncumulative)Current Yr. ($50 par × 6% × 3,000 shares) 9,000
Remainder 11,000$
Common stockCurrent Yr. ($11,000 Remainder) 11,000
Remainder 0$
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On June 1, 2003, a corporation’s board of directors declared a dividend for the 2,500 shares
of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
Dividends
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On June 1, 2000 a corporation’s board of directors declared a dividend for the 2,500 shares
of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
GENERAL JOURNAL Page 12Date Description Debit Credit
July 15 Dividends Payable 20,000
Cash 20,000
$100 × 8% = $8 dividend per share
$8 × 2,500 = $20,000 total dividend
Dividends
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Focus on Cash Flows
Outback
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Restrictions on Retained Earnings
If I loan you $150,000, I will want you to restrict your
retained earnings. Why would youwant to do that?
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Restrictions on Retained Earnings
Because I want to restrict the amount you can pay out
in dividends.
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Accounting and Reporting for Three Types of Businesses
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End of Chapter 11
C’mon Chester! With your smarts and my savvy, we
could make a great partnership!!